You have never been able to save more for your retirement. The annual limit for contributions to a 401k rises to $17,500 in 2013 compared to just $12,000 a decade ago. This $500 increase was the second such rise in the limit in two years, allowing you to save more into your 401k plan than ever before.
Of course, the cost of living in the US has also risen significantly in the last ten years. Based on the Consumer Prices Index, a burger that would have cost you $3 back in 2003 will cost you $3.75 today. So, while the 401k contribution limits have risen over the last decade, have they actually risen in real terms? Our guide explains.
Have the 401k limits become more generous in the last decade?
In order for 401k contribution limits to remain fair, they would have to have risen by at least the rate of inflation. Anything less and you’d actually be able to save less for your retirement in real terms than you could before.
The red line in the chart below shows the annual 401k contribution limit in each year since 2003. The green line shows what the 4501k contribution limit would have been had the limit been increased by the annual inflation rate each year.
[Inflation figures from US Inflation Calculator]
What you will notice from this graph is that the 401k contribution limit has consistently been increased above the rate of inflation. Even between 2009 and 2011 when the limit remained the same, you were allowed to save more for your retirement than you would have been had the limit simply changed by the rate of inflation.
What does this mean?
As the 401k contribution limit has risen faster than increases in the cost of living, the result is that the limit is more generous in 2012 than it was in 2003.
Had the 401k limit increased by the rate of inflation since 2003, in 2012 you would have been able to contribute $14,992 to your 401k plan. However, the actual limit was $17,000. So, over the last decade the government have consistently allowed you to save more and more into your 401k plan.
Are you making the most of this generous limit? Do you think the 401k limit should be linked to inflation? Tell us in the comments below.